As to another angle on today’s financial woes, Paul Krugman (from whom I borrowed the “Russian Roulette” phrasing) weighs in with an editorial wondering why the Bush Administration has failed to act when the writing of this crisis has long been on the wall. Instead, “Hank” Paulson and his benefactor, George Bush, are playing a much bigger game of Russian Roulette with our economy.

5 Responses to “McCain Wanted to Play Russian Roulette with Your Social Security”

Investing for retirement is, by definition, a long-term proposition – 49 years if we go by Social Security’s guidelines. I fail to see what short-term fluctuations of the stock market have to do its long-term stability. Besides which, you don’t need to invest in stocks beat Social Security. Those of us who started in the Ponzi scheme after 1990 are now GUARANTEED a negative rate of return. I can do better than that with a savings account at my bank.

Put down the kool aid. Your statement that those who started in social security “after 1990 are now GUARANTEED a negative rate of return” is false. I won’t call it a lie and will assume you are simply ignorant of how the social security trust fund works.

The trust fund is, as it has for over two decades, been gathering social security taxes at a surplus, i.e. it brings in more through taxes than it pays out in benefits. The surplus stands at approximately 2 trillion. The surplus is designed to get us through the retirement years of the baby boomers when we are expected to pay out more than we take.

The Social Security Administration as staffed by Bush hacks has created the current dust up by claiming, using a very pessimistic growth rate scenario for America, that the surplus will be used up by 2042 until we get through the bubble and return to 100% payouts. At its worst, under this scenario and without doing a thing, we will still pay out more than 70 cents on every “promised” dollar of benefit. No one claims that this scenario is guaranteed or even that 70% of promised dollars reflects a negative return. In fact, if we have traditional growth in America, there will be no problem.

The trust fund has been receiving a rate of return at over 5% per year; higher than a bank savings account. But Bush & McCain didn’t want the social security funds to go into safe, savings account. They were pushing investment in the stock market.

One indicator of stock market growth you may have heard of is the Dow Jones. In almost 8 years under Bush, it’s gone from 10,570 to – what – 10,917, as we speak. If your retirement funds followed the stock market you would, in fact, have less than one-tenth of one percent growth. That would be negative growth in terms of constant dollars.

I wasn’t aware that employing simple mathematics constitutes “drinking Kool Aid”. Let’s look at Social Security from the point of view of an average 18-year-old entering the system. We’ll call him Joe.

Joe will work from age 18 to age 67: 49 years. During that time, 12.4% of Joe’s salary will be contributed to Social Security. So his total contributions will be 49 * 12.4% = 6.08 times his annual salary. The life expectancy of an 18 year old is 65 years. So Joe can expect to live to be 83, enjoying 16 years of retirement. During those golden years, Social Security will replace 41% of Joe’s pre-retirement income. Ergo, Joe’s total payout from Social Security will be 16 * 41% = 6.56 times his annual income. Holy mackerel! Joe turned a profit!

The scenario above assumes taxes and benefits remain where they are. However, as everyone knows, that’s not a realistic assumption. Either taxes have to go up or benefits have to go down. The latest Social Security Trustee’s Report suggests either increasing the tax to 14.1% or decreasing benefits 12%. Either way, Joe would end up getting less out of Social Security than he paid in. I’ll leave that math as an exercise to the reader.

Now you’re going to say that I’ve forgotten about inflation. Yes, I’ve omitted inflation. But I’m fairly certain you can find a 100% safe investment that keeps up with inflation. Heck, if nothing else, buy TIPS.

Finally, let’s talk about about today’s “crash”. As of COB today, the S&P 500 stands at 1192.7. On 9/15/1960, the S&P 500 was at 55.22. That’s a 6.4% nominal return over the past 48 years and that doesn’t even include dividends. Now how about that inflation? Well, inflation has been high over the past year. According to the BLS, inflation has averaged 4.18% since 1960. That still leaves a 2.22% real return. Toss in 2.5% for dividends and it’s more like 4.72%. I’d take that over Social Security every day of the week and twice on Sunday.

First, thanks for the walkback – albeit a long winded one – from your false statement of a GUARANTEED negative return on Social Security.

Your analysis is so jam packed with rightwing assumptions posing as facts that I could spend hours responding. I’ll just point out one obvious problem that undercuts your whole spin. You cite the Social Security Trustees (pro-privatization, Pro-Bush) statement regarding cutting benefits or raising SS taxes without noting this is based on a pessimistic model for future growth.

You then compare that to an expected rate of return on private investment by using a very positive view of future growth based on past performance. You are using two different and contradictory projections of future economic growth to reach your desired conclusion. (I would also note that one factor that makes a big difference in that past performance is that the terms of Democratic presidents coincide with far greater growth than the terms of Republicans).

If you use the model going back to 1960 that you use, there will be no need to raise SS taxes or cut benefits.

Most importantly, our differences are philosophical. I will agree that theoretically private investment of retirement funds by sophisticated investors, with all of its attendent risks and rewards, should yield a higher return on average than we should get by limiting investment of the social security funds in in very safe special government bonds.

The trade off is alot of people who privately invest their retirement monies will, through lack of sophistication or even just lack of good fortune, fail. Will we let them eat dog food during their “golden” years or bail them out? This is the road Bush and McCain want to take us down.

You are apparently in favor of doing away with SS altogether and I am not. I think a safety net for a core retirement is one of this country’s greatest accomplishments. Let’s let the country decide – McCain favored one route and Obama has always favored the other.

If you don’t like the numbers from the more recent Social Security Trustees’ Report, go back to the last report from the Clinton administration. Unless, of course, you think Secretaries Rubin, Herman and Shalala are also rightwing nuts. You’ll find mostly the same numbers. From page 24 of the 1999 report:

If no corrective action were taken, trust fund assets would be exhausted by the end of 2034. At that time, the annual tax revenues of the combined trust funds would be sufficient to cover about 71 percent of annual expenditures.

Our hypothetical Mr. Joe started working in 1990. He doesn’t get to retire until 2039. That’s 5 years after Clinton’s trustees estimated benefits would have to be reduced by 29%. So much for Joe turning a profit.

What other rightwing assumptions have I made?

Furthermore, I never claimed that the stock market will outperform Social Security in the future. Personally, I believe that, but it’s immaterial to my argument. I’m simply stating Social Security now guarantees a negative rate of return. I guess I shouldn’t have mentinoed yesterday’s “crash”. I just analyzed it to preempt any mention of the “poor retiree” who retired yesterday.

Now, you say that investors would require a certain degree of sophistication. Why? It’s absolutely trivial to match the average return of the stock market. All you have to do is buy an index fund. OK, to be fair, you’ll get the average return of the stock market MINUS fees. I don’t know about you but I’m willing to pay the 0.18% expense ratio on Vanguard’s S&P 500 index fund.

Also, I want to address this notion you have about the trust fund earning over 5% interest. First of all, I’m paying that interest. Lest we forget, the interest on government bonds comes from tax revenues. If I were actually allowed to keep that interest, I guess it wouldn’t be so bad. However, the interest the trust fund earns has absolutely nothing to do with the rate of return that anyone receives from Social Security. As a simple counterexample, just consider someone who dies a day before they collect Social Security. Their rate of return is effectively negative infinity.

Finally, I have no issue with a social safety net. I would love to have a social safety net. Unfortunately, Social Security is not a social safety net. If it were, billionaires like Warren Buffet (another rightwing nut) would not collect it. A social safety net would not be exclusively funded by a tax on workers (no matter how poor, I might add). Nor would the wealthy collect from a social safety net.

Consider this. For less than half of what we spend on Social Security, we could completely eliminate poverty in America. Social Security hasn’t even elimintated senior poverty. If you want to help the poor, help the poor. Don’t design an intergenerational wealth transfer scheme and try to pass it off as “insurance”. Social Security has been a fantastically successfuly political tool. But as an anti-poverty program, it’s a heinously expensive failure.